What Are Appreciating Assets?
As a new investor, the seemingly endless number of investment options may overwhelm you. However, one thing you probably want to know are the different types of assets to invest in, and which ones appreciate or depreciate over time.
What Are Appreciating Assets?
An asset is a resource you possess, tangible and in person, digital, or otherwise. An asset that traditionally increases in value as time goes by is called an appreciating asset. How much it appreciates is usually tied to risk: When the risk is low (like with certificates of deposit or bonds), the asset’s value doesn’t go up significantly. With higher risk, the potential payoffs can also be greater.
A depreciating asset is one that goes down in value over time. A car is a prime, tangible example — vehicles are notorious for plummeting in value the instant you drive off the lot. Unless you’re driving a vintage classic, you will not get what you paid for when it’s time to sell your car.
So what does this mean for investors? Let’s find out.
How Does Asset Appreciation Work?
Ideally, the stock you purchase today will be worth more next year. The difference is the appreciation. An asset may appreciate in value if the demand for it increases or the supply diminishes. For stocks, appreciation is usually tied to the financial performance of the company.
On the other hand, if an asset in your portfolio is worth less in a year than today, that asset is a depreciating asset. With stocks, many factors outside of your control contribute to their appreciation or depreciation.
In simple terms, an asset’s value can fluctuate over time. It’s even possible for assets to appreciate in value one year and depreciate the next.
How Does Inflation Impact Asset Appreciation?
With average inflation for the last 12 months at over 9%, some assets can no longer be considered appreciating assets. As a rule, appreciating assets must gain value at the same rate as inflation.
Otherwise, they’re considered depreciating assets because you’re essentially losing money. If they only keep up with inflation, you simply break even. What you’re looking for is a substantial gain in value. That’s how you build wealth.
Types of Appreciating Assets
If you want to invest in appreciating assets, there are many options to choose from:
- Stocks and bonds
- Private equity (ownership in a private business)
- Real estate and real estate investment trusts (REITs)
- Rare art
- Commodities (grains, silver, gold, beef, oil, natural gas)
We’ll discuss each of these options below to help you decide which one is right for you.
Stocks and Bonds
Stocks and bonds might be the most popular assets because they make up every 401(k), 403(b), and IRA. You can invest in stocks and bonds outside of your retirement account, too, but without the tax deductions.
Historically, the stock market has increased in value since the Great Depression, despite its dips and valleys along the way. Therefore, as a long-term investment, stocks can be a great wealth-building tool. Bonds offer less risk of losing money, but the return on investment is also lower.
As a private investor in a business, you might out-earn the stock market. After all, companies tend to appreciate in value much more before they go public. Venture capitalists base their business models on private equity investing.
But don’t make the mistake of buying into your cousin’s business if you want to build real wealth. Instead, invest the bulk of your money in a proven venture.
Real Estate and REITs
Real estate investing comes in many forms. Some people flip properties for a quick gain, while others hold on to their real estate for rental income. The downside to real estate investing is that it comes with a hefty price tag — it can mean a six-figure purchase that can take a few years to pay off.
REITs, short for real estate investment trusts, allow investors to get started with much less upfront spending. Instead of buying real estate, you’re investing in a share of the real estate.
The best part of REITs: you don’t have to unclog a tenant’s toilet.
You probably haven’t considered buying an original Van Gogh because rare art is extremely valuable. It’s the purchase a billionaire might make.
But it turns out that you can invest in fine art without covering the entire cost of the piece or assuming all the risk yourself. As it happens, you can become part owner of an Andy Warhol painting, for example, for a fraction of the price.
Using this approach is especially important if you’re a novice in the art world. After all, identifying which artists produce appreciating assets takes knowledge and experience. You also don’t have to worry about selling the art yourself, which can be just as difficult as procuring it.
While prices for gold and silver fluctuate, it’s not likely for them to lose all value in the future. Gold and silver are both limited commodities. You can also invest in beef, oil, natural gas, and grains.
Many collectibles appreciate in value over time. Some vintage toys, for example, are worth more money than any new toy you can find. Collector’s items also include cars, fine wine, baseball cards, and stamps.
Another advantage of investing in collectibles is the fact that it can be fun. While you can only enjoy sitting behind a monitor and clicking on stocks to buy, it’s another thing to be able to have a vintage car in storage that you can admire at any time. On the downside, you may not find a buyer for it, and fraud is a genuine concern.
Should You Purchase Appreciating Assets with Debt?
It can sometimes be a good idea to use debt to buy assets. For instance, most people take out a mortgage to buy a home, an asset that often appreciates in value. And if you don’t plan on moving within the next five years, that’s not a bad idea.
But what about buying other appreciating assets with debt, such as stocks or collectibles? Well, if your assets yield a greater return than the cost of the debt, this would be good debt. The problem is that you can’t guarantee that the value will go up.
How to Get Started with Appreciating Assets
Like with many other investments, the best time to purchase appreciating assets was 20 years ago. The second-best time is now.
Many investors will start small and diversify. Investors may choose to buy some stocks, invest in a REIT, or even invest in a share of valuable art. Do your research to find out what works for you.
It might be nerve-wracking to invest your money, but with the current rate of inflation, you run the risk of losing money if you don’t invest it.
This material is provided for informational purposes only and should not be relied on as investment advice.